Current events in the words of the students of Vinod Gupta School of Management, IIT Kharagpur

Lending Trouble

The following article is based on my own interpretation of the said events and/ or publicly available information. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.

The ripples created by Vijay Mallya’s Kingfisher Airlines defaulting their repayments has not yet settled. The arrest of the top brass of IDBI Bank for approving Mallya’s loan has made the banks, especially the public sector to be cautious in dealing with the large non performing accounts. It seems that the stressed loan accounts may have to undergo the bankruptcy code and might not get a helping hand like they used to in the past. Previously, the banks used to take certain steps to help the corporate borrowers during stressful times. They often restructure through methods like lowering of the interest rates, increasing the payback period, conversion of debt into equity in which the bank appoint its representative in the director board, all of which actually helped these heavy borrowers to surpass their hurdles.

When the bankruptcy code is invoked as soon as the business is stressed out, without considering the restructuring option in fear of actions from enforcement agencies, the firms which otherwise might have had a huge chance of being revived, will get axed without even being given a second chance. This actually does more harm as once the firm is declared bankrupt, it can never be sold for the market valuation it had. The firms will be taken up for auction by the banks which fetches them only a depressed value or as in many cases, no takers at all. Thus the banks lose out again on a large chunk of its capital. At the end of all this the public funds are at stake due to this. Hence it is high time that the RBI come up with a structured procedure to revive large corporate firms depending upon their potential to rise again. Instead of writing off the large debts , it can actually be realized in most of the cases. The current behavior of the banks might only help the asset reconstruction firms.